Cigarette smoking remains a major health problem in the U.S. and worldwide. The observed overall decline in smoking prevalence in the U.S. during 2005-2010 is not mirrored by a similar decline in teen smoking. The goal of this project is to develop and implement a theoretical network formation model that will enable a better characterization of the environment in which teens make decisions concerning risky activities. In particular, this project initiates a comprehensive study on how friendship networks affect individual choices and, conversely, how individual decisions to engage in risky activities affect friendship networks. The proposed approach differs markedly from previous work in that it models simultaneously decisions regarding risky activities and decisions regarding friend selection, within a single framework. In the proposed model for studying peer effects, causality can flow in both directions: individuals’ choices affect selection of friends and friends’ behavior (the proportion of current friends who smoke) affects individuals’ choices (to smoke or not). This research also develops an innovative way to handle multiplicity of equilibria (multiple possible network and action configurations) – a ubiquitous problem in research in social sciences. Specifically, the behavioral assumptions of the model we develop naturally assign probabilities to all equilibria of the static game (in contrast to previous work which adopts somewhat ad hoc selection rules). Finally, the model has the capability of generating cascade effects – a network feature where a large proportion of the population finds it optimal to alter their behavior (become smokers or engage in a risky activity for example) over a short timeframe. Previous models in the literature consider only network formation or teen choices given an exogenous network and cannot generate cascade effects. The empirical work will examine the evidence for cascade effects in the context of smoking behavior and evaluate the epidemic hazard, (i.e. the probability of a cascade effect happening) which depends on model parameters. The proposed TRIO grant will enable further development of the broader research agenda on understanding the determinants of socioeconomic networks and individual choices with prospects of attracting future external funding. It will build on substantial progress that has already been made in developing the theoretical model, building an estimation strategy, and obtaining approval for the restricted-use Add-Health dataset.

This TRIO will lay the groundwork for a NIA competitive renewal application in 2010 that will be directed towards evaluating the medium‐ and longer‐run impacts of important dimensions of the 2008 Chilean Pension Reform. These changes were not anticipated or covered by the current grant when it was developed in 2003‐4. In particular, the proposed TRIO project will: (1) Characterize the relevant details and time lines of the multiple components of the 2008 Reform. (2) Conduct comparative short‐run analysis for the Preliminary Analsyis section of the new application, using the 2006 and 2009 EPS before and after the initiation of some components of the Reform, of behaviors such as formal pension contribution system participation and financial literacy, with particular attention to groups that have traditionally had low participation (e.g, women, youth, rural residents). (3) Develop initial dynamic structural models to analyze the medium‐ and longer‐run impacts of the 2008 Reform to be presented in the Methodology Section of the new application. These models will permit assessing how changes to the pension system, of the kind introduced by the reforms, affect work, pension contribution, investments and retirement behavior. The TRIO analysis is expected to increase significantly the prospects for a successful competitive renewal application through developing a better research strategy for understanding the latest significant changes in the Chilean pension system which, as noted above, has been and continues to be a model for other countries.

This project will study how rules and regulations governing retirement savings and unemployment insuranceaffect incentives for savings in different kinds of assets (liquid and illiquid) as well as incentives for working.The project will develop and estimate a model of life-cycle savings decisions using Chilean data from theSocial Protection survey, which was administered in 2002, 2004, and 2006 combined with administrativedata on voluntary and involuntary pension contributions that go back to 1980. The model will incorporateuncertainty and relevant institutional features of the social security system, such as tax deferral, minimumpension, and mandatory contribution amounts to both the pension and unemployment insurance system. Itwill also examine how savings decisions relate to the financial literacy and demographic characteristics ofpension program affiliates.

In the U.S. and in Chile, there have been heated debates about the relative merits of a decentralized privatized pension system relative to a more traditional social security system. One criticism of a privatized system is that consumers are not sufficiently financially literate to make saavy decisions when it comes to selecting among funds in a way that takes into account commissions/fees and fund performance. Another concern is that consumers may not understand risk-return relationships and may therefore tend to take on too much risk. On the firm side, critics of decentralized, privatized pension systems raise concerns that firms can engage in anticompetitive behavior and may be able to take advantage of consumers’ lack of knowledge by charging them high fees and account maintenance charges. The proposed research contributes to this debate by analyzing the key determinants of consumers’ choice of fund and choice of investment portfolio within a fund. Specifically, we examine how decisions depend on demographic characteristics, current and past fees and returns, financial literacy and risk preference. To study these questions, we analyze two rounds of a longitudinal dataset recently gathered in Chile - the 2002 HLSS (Historia Laboral y Seguridad Social) data and the 2004 EPS ((Encuesta de Previsión Social or EPS) data. We merge the individual level household survey data with administrative data on pension plan holdings and contributions, on returns, market shares, and the fee structure of different funds. This research will also provide new evidence on whether mutual funds structure their fees so as to target different segments of the market, on how their consumers differ, and whether and to what extent they engage in practices, such as imposing exit fees, that inhibit competition among funds and discourage new entry. The work in this project will form a solid basis for a more comprehensive research proposal either to NSF or NIH in the future. The project is indirectly related to health, in that health affects financial investment decisions and financial security after retirement may also have a direct effect on health.

This project uses newly available data from the HLLS (Historia Laboral y Seguridad Social) survey to study the effects of the Chilean school voucher program on education and earnings outcomes, that has been in place in Chile since 1981. School voucher program are currently under consideration in the U.S. and have been tried on a small scale in some U.S. cities. The Chilean experience offers a unique opportunity to learn about the effects of school vouchers implemented on a broad scale. The aim of this project is to develop a behavioral model of decisions about schooling and work, prepare datasets, and do some preliminary data analysis that would support a future application to NICHD. In the behavioral model, parents send young children to private school with some probability that depends on their family characteristics (parents age, education, poverty status, number of siblings) and on whether or not theyare eligible for vouchers. Older children make decisions about whether to attend school, what type of school to attend, and work. A second goal of this project is to explore the use of a new survey currently being administered in Chile to 6000 current and former primary and secondary school teachers and to investigate the potential gains from linking these data to administrative data on test scores.